The IFA and Retail Food Prices

For most people, one of the few positive elements of the current slump is that the sharp decline in the cost of living has somewhat cushioned the blow of declining nominal incomes. But deflation has not been a good thing for everyone. In particular, farmers have been hard hit by declining food prices.

One can only have sympathy for farmers who are struggling with current market conditions. However, the current campaign by the Irish Farmers Association (IFA) aimed at blaming retailers for falling prices is based on poor economics and its calls for policy intervention should be resisted by government.

New IFA President John Bryan opened his term in office by highlighting the IFA’s campaign against retailers (newspaper story here). From the IFA’s press release:

John Bryan said, “For our important role as food producers, farmers need a minimum price from the market place to cover our costs of production and derive a fair income. Retailers, processors and marketeers have clearly failed to return a price capable of providing a viable income for family farmers in all the main sectors.”

The new President said, “The discounting of Irish food produce is being done at the expense of farmers, while the multiples protect their margins and boost their corporate profits. This is daylight robbery and an affront to any fair sense of corporate responsibility. This corporate greed and contempt for the men and women who produce our food must be addressed.”

He said politicians at home and in Europe must rebalance the food marketing chain, through legislation if necessary, to ensure that farm families can get a viable income from the marketplace.

Let me first address the poor economics behind this campaign before turning to the reason to be concerned about it. Farmers are receiving lower prices for their products than they were in 2008 because of a range of factors. The Euro has appreciated making food imports cheaper; there has been an increase in cross-border shopping as food prices in the North have declined relative to those in the Republic (though this is not as pervasive an activity as presented in the media); consumer demand for high-end food products has probably also declined.

For these reasons, retailers have been in a stronger position to negotiate lower food prices with Irish suppliers. Competition among retailers has then seen these lower wholesale food prices getting passed on to consumers in the form of lower retail prices: Food and non-alcoholic beverage prices were down 7.6 percent in the year to November according to the CPI. These lower food prices benefit the economy at large by easing pressure on wages and improving competitiveness.

In relation to retail prices, Mr. Bryan does not seem to be suggesting that retailers are increasing their margins (“protecting” margins has the connotation of keeping them the same). Indeed, his focus on discounting (as seen through various two-for-one deals and the like) suggests that he is aware that retailers are also under pressure due to slumping consumer demand and shoppers become increasingly concerned about cost. Indeed, the spread of discounting is a sign that retail margins are most likely falling.

Ultimately, the IFA is adopting a backwards causality view of pricing. The IFA sees low retail prices as causing low wholesale prices. The classic example of this viewpoint was previous IFA President Padraig Walshe’s regular objection to two-for-one offers on ham on the grounds that “Every producer knows you can’t feed two pigs for the price of one”, a slogan that was regularly aired at IFA protests outside Supervalu stores last year as the Irish retailer dared to offer its customers half-price meat.

In reality, the direction of causality runs from wholesale prices to retail prices. Every Irish supermarket could sell ham at half price as a loss leader from now until kingdom come and it would not change the wholesale price of ham. So no need to worry about underfed pigs.

To be honest, I’d guess the IFA leaders know all this. So why are they running this campaign to demonise supermarket retailers? I suspect this is partly a political thing. IFA leaders need to be seen to be doing something and kicking lumps out of “greedy corporations” always goes down well with the troops.

However, there is a more sinister side to this campaign. The call to “rebalance the food marketing chain” is effectively an appeal for interference in the retail market in ways that will strength the hand of farmers and thus raise retail food prices. The campaign has already been successful enough to produce a DETE consultation paper on a Code of Practice for Grocery Goods Undertakings. The express purpose of this code appears to be weakening the ability of retailers to sell products for low prices. The ESRI’s Paul Gorecki has published an excellent critical discussion of these proposals in the latest edition of the Economic and Social Review and I’d refer you there for more on this.

None of this is to say that there aren’t serious issues relating to the sustainability of small-scale Irish farming. But ultimately, it is not in fact the responsibility of retailers to “provide a viable income for family farmers” any more than it is their responsibility to provide a viable income for producers of toothpaste. Farm incomes may be a policy issue but tampering with the retail sector in a way that reduces our competitiveness is not the way to deal with that issue.

46 replies on “The IFA and Retail Food Prices”

Well said Karl.

Is it possible that the IFA’s focus on retail market intervention has something to do with the idea that farm-level intervention might be tricky? (farmers being exporters to other EU countries and all)

In any case, the idea that forcing retail prices higher would somehow pass higher prices on to farmers is laughable. If it reduced demand for food, surely wholesale price would fall further.

While I’d sympathise with anyone working hard and struggling to make ends meet, I can’t understand the obsession with small farms. We don’t insist on protecting small clothing manufacturers or small factories; so why small farms?

Dissapointing to see that business as usual continues at the IFA. Surely there is some stance they can take that has economy wide aswell as sectoral benefits. (Perhaps not?) In the meantime of course our great leaders will refuse to pursue the common good at the expense of the farming vote.

Regulation of slaughtering leading to limited competition in meat packing and the growing dominance of large retailers have left the farmers selling into an uncompetitive market. The farmers are to a degree at the mercy of the dominant players. Perhaps if the slaughtering, packing and retail markets were more competitive the farmers wouldn’t perceive the retailers as acting with impunity.

One also needs to look at the farmers bargaining strength vis-a-vis the retailers compared to the bargaining powers of other producers. Does the fact that farmers are a diffuse group that cannot sack themselves make them more vulnerable in negotiations? If so, does this mean that retailers will target farm produce for the bigger savings because it is easier to pass it on to them then to pass it on to Proctor and Gamble et al?

While I’d agree with the prevalent view of the posters that the IFA are wrong and that market forces should be allow to determine food prices, we shouldn’t assume that those market forces are going to keep food prices low forever. The outlook for food prices, particularily the prices paid to farmers, is far more dependent on what happens in China and India than on what Tesco do.

Between 2005 and 2008 there was a developing global food shortage, resulting mainly from increased consumption in China and India. This saw food surpluses vanishing and global meat and dairy prices doubling. Despite the fact that the Euro appreciated strongly against both sterling and the dollar in that time, agricultural output prices in Ireland rose by nearly 30 per cent between 2005 and early 2008. Then, the global recession intervened and global meat and dairy prices fell back to their 2005 levels. If the global economy grows strongly again in the next few years, then its very likely that global meat and dairy prices will soar once again. In fact, there are allready signs that this is happening in relation to dairy and lamb prices. Wholesale lamb prices, in particular, are allready soaring and this will hit retail outlets in coming months. Expect other meats and dairy products to follow suit later in 2010.

Unfortunately it is easier to bully government than take on processers and supermarkets.
Why not:
1 Cancel all contracts with current companies.
2 Set up coops and work again from a more organised base.
3 Coops become profitable, and float on markets for cash.
4 Spend cash enjoy life.
5 Notice coops are screwing ye again
6 Start at 1 again

Al

This is the usual stuff from the IFA. They sort of realise that they face something close to perfect competition and think its unfair. Ultimately that is one of the reasons why they started the COOPs. Of course they cashed in on those a long time ago. As a very professionally run organisation the IFA could easily get involved in the wholesale and processing side of things again, but they won’t – I wonder why? Exports are only ever mentioned in the context of some barriers that need to be removed yet they are keen on barriers on imports – as one of the most export orientated farming sectors in the world this is the hight of hypocracy.

IFA is a VERY powerful political Special Interest group. They have (almost) completely captured (roped and branded) our entire legislature!!

Some observations:

We all need a minimum amount of food each day. Distance from source to consumer is critical, including (processing, preservation, etc.).

The more of population in urban areas, the greater the ‘costs’ involved.

Contemporary agricultural practices (mostly) are 100% dependent on liquid fossil fuels, energy dense processing, inorganic fertilizers using Nat. gas or other fossil fuel feed stocks, etc.

Farmers have families to raise, and all this entails. Many have high level of personal debts to discharge. Min. arable land requirement is approx 10 hectares; to raise your family, feed your stock and have a small surplus to barter. No NAMA here – yet!

Big agriculture re-think is needed. Very improbable at present time. So, its Oliver Twist time again … “Please Minister may we have some more” – (aka: taxpayer subsidization).

Food prices will surely rise – sharply. But principal variable cost will be an external one; (fuel, energy and processed feedstock). No appreciable benefit to either farmer or consumer. There are solutions available, but they would be as welcome as the current foul weather.

B Peter

Disclosure: I have a small farm (in forestry) and am an IFA member.

@ Eamonn Moran

That IT article you linked to doesn’t seem to address margins on Irish agricultural produce. The profits aren’t necessarily accrued by sales of these particular goods.

Ah, bash the farmers. A long time since I heard that one. Must be, oh, the last recession…

The non-farm rural economy has largely collapsed. Look at the unemployment blackspots. Much of the bubble construction employment disordered the wind-down of small farms by:
a) providing lucrative off-farm employment (driving stuff)
b) increasing land values allowing investment in new plant, stock, and buildings, some of it required, some of it of more dubious need
c) making it expensive to consolidate holdings and increase farm sizes

What alternatives do you have for the countryside other than people making a living on it? Who here likes to buy organic produce? Or at least free-range?

When @JohntheO says:
“Wholesale lamb prices, in particular, are allready soaring and this will hit retail outlets in coming months. Expect other meats and dairy products to follow suit later in 2010.”
I expect little of this will make its way back to the farm gate…

on the other hand, if we require Irish and European farmers to compete with 3rd world farmers, then we must allow them to compete on a level playing field. The ban on GM crops, regulations of medicines, fertilisers, chemical pesticides, bureaucratic traceability systems, and other food and environmental protections all undermine the competitiveness of Europe farmers.

Urgent action is needed on all of these market distorting measures if we expect European farmers to compete with international farming.

@tommy
We should also remove all minimum wage protection from their staff, let fallen animals lie, let them spray dung where they please, let them loose dry cows on city streets, etc. etc.

Of course, we could just remove the single farm payment and then they would all go bust. It would be efficient, after all…

You are what you eat…

@ John the Optimist.

I don’t know where you got information that lamb prices are soaring.

In the early 90s a lamb went for IR£70-£100, today they go for €50-€90. Even discarding 20 years worth of inflation and the mark down from the change from Punts to Euros, the price of lamb has still fallen over the period. A real economist could probably work it out accurately, but this armchair economist guesstimates that’s about a third of the real price in the early 90s.

There was a blip in the market in November when the Islamic Hajj came round, but nothing anyone could call a soar in prices.

The problem is that there is no functioning market. Animals are sold in small local marts, where typically the same 2-3 end buyers are present every week for years on end. There is no incentive for them to bid against each other. Indeed, a slaughterer would have to be a fool to bid against another slaughterer, as next week the shoe could be on the other foot. The farmers are always “price takers” -and the structure of small local marts perpetuates this problem.

@YoganMahew

I’m not saying we should do all or any of this; but on the other hand, if we expect European farmers to take on all these extra expenses in the name of public goods, then some form of support must be maintained -either by guaranteed prices or some other means. It’s unrealistic for European farmers to compete with countries where farming does not face any of these costs. Guaranteed prices may not be economically elegant -but then the levels of food and environmental securities that Europeans want cannot be attained for free, and public goods should be paid for by the public -not by small farmers on low incomes.

I completely agree that you are what you eat; but Europeans are increasingly eating food from overseas where all the practices I listed above are permitted. In fact, it’s all a little bit mad.

None of this is to say that there aren’t serious issues relating to the sustainability of small-scale Irish farming. But ultimately, it is not in fact the responsibility of retailers to “provide a viable income for family farmers” any more than it is their responsibility to provide a viable income for producers of toothpaste. Farm incomes may be a policy issue but tampering with the retail sector in a way that reduces our competitiveness is not the way to deal with that issue.

Here’s a memo to the economists of IrishEconomy.ie; it isn’t the responsibility of farmers to protect the margins of supermarkets, either (and no-one’s fooled by “competitiveness”. Funny how that ever only goes one way).

While we’re on the subject, while it’s easy to see where farming is a productive part of life, it’s not at all easy to see where economists (so often wrong) lend value to modern society.

I rather hope that the European Parliament might have an impact on the area. Until now, there has been noone for farmers to lobby about CAP. The Irish Minister could always say that he/she had no authority to do anything, Irish TDs really did have no authority to do anything and MEPs were completely out of the loop. Since Lisbon passed, farmers finally have elected representatives (instead of unaccountable EU bureaucrats) who will have an impact on CAP and who will have to listen to their points of view too. I can’t think of any other economic sector which has been so politically marginalised in recent decades, but hopefully now farmers will be able to fight their corner as well as other economic stakeholders do.

I rather hope that this will result in major reorganisation of CAP supports away from food processing and towards small farmers.

@Tommy Tighe
“I can’t think of any other economic sector which has been so politically marginalised in recent decades…”

Actually aren’t farmers effectively public sector workers. I thought most of their income comes from the Irish taxpayer through the EU and from the EU itself. So what is their attitude to public sector workers who are paid directly by the Irish government?

“Farmers have strongly criticised union leaders involved in today’s public-sector strike, claiming they are “living in cloud-cuckoo land”.
Indeed.

“IFA president Padraig Walshe says some political and union leaders are misleading the public into believing there is a “crock of gold” in the private sector that can be tapped to meet the shortfall in the public finances.”
What about all those house and road sites?

“He says the average farm income is now just €13,000 – one quarter of the average salary in the public sector.”

Read more: http://www.breakingnews.ie/ireland/farmers-hit-out-at-public-sector-unions-435596.html#ixzz0cXpRTSRF

Is the average full time Irish farmer really living on €13,000. If they are, why are they always demanding the minimum wage be cut?

If they took up a mininum wage job then working their standard 60 hour weeks for their standard 52 weeks a year at €8.65 they would make twice as much as they currently do: €26,988.

It’s interesting to observe the asymmetric reaction to price changes and exchange rate movements among farmers and other business people.

There is no official data on development land sales and the bonanza made by some farmers for a reason. It wouldn’t have served the interest of farmers and builders. However, the amount the State had been forced to pay out for land compensation was described as “disturbing” by the head of the National Roads Authority in 2006.

It accounted for 23% of the cost of roads projects in Ireland, but just 12% in England, 10% in Denmark, 9.4% in Greece and 1% in Iceland.

A further 2% of the €18.5bn provided in the Government’s Transport 21 for road building over the succeeding decade would go to archaeologists.

Food and drink exports at €7bn, were 4.5% of total Irish exports in 2009.

In July 2008, we had the bizarre spectacle of the multimillionaire Irish farmers’ leader on centre stage as he repeatedly called for the scuttling of the WTO Doha Round trade talks in Geneva, while Ireland’s politicians kept a low profile and the principal Irish business lobby group IBEC, issued three statements to keep its diverse interests tuned up.

Prof. Alan Matthews rejected the IFA claim that a WTO deal would put 50,000 farmers out of business.

He wrote in the Irish Times: “Farmers now depend on the decoupled single farm payment for 50% of their income.

A further 25% comes from payments for agri-environment services and other public goods (Reps, forestry, less favoured area payments).

In addition, around 42% of farmers have an off-farm job and 82% of farms have off-farm income from either the farmer or spouse. Thus the income obtained from farming – the element affected by a WTO outcome – only accounts for about 8%, on average, of farm household income,”

Irish land prices have been the highest in Europe for some years.

Very little land has been put on the market, which suggests that incomes are not under tremendous pressure.

According to Savills in 2007, in France, each field changes hands at least once every 70 years, but in Ireland on average a field changes hands every 555 years!

Irish farmland prices fall but remain highest in Europe – More than 4 times UK average and 10 times price in France:

http://www.finfacts.ie/irishfinancenews/article_1015968.shtml

The farming movement was capable of organizing co-ops that increased markets and prices for farmers. Is it impossible to do this again?

The intervention of OPM, other peoples money, carpetbaggers was a feature of the easy credit times. Some of them may be in trouble now for over expansion. Retailing the world over is now incredibly efficient albeit at the expense of jobs and supplier margins. That is not going to be reversed now, it is a staple feature of the real economy.

New methods, products and marketing will require more capital from farmers. Do they really suppose that a 1% return from their land and fixed assets is ever goin g to reach 5% except by the asset values falling? Things will worsen before they get better, best to sell up now and buy back in 10 years or so. The sooner they sell, the sooner they can buy back!

Paul Iticsdotayee
Good point. The beal bocht was always going to extremes. Their assets are far too high. They are all clearly inefficient, far more so than any OTHER public sector worker!

@Paul Iticsdotayee

Indeed there are virtually no young people staying on small farms. They have gone to the cities to pursue employment at or above minimum wage rates -so there is not much point asking why they haven’t. Realistically, all remaining small farmers need an additional income -usually OAP.

I’m sure some farmers make a decent living, but I can’t think of a single farmer I know who would be on the minimum wage. I’m not saying they necessarily should be on the mimimum wage either -they are self-employed after all (despite your strange conjecture that they are public servants) and have small living costs.

According to Savills in 2007, in France, each field changes hands at least once every 70 years, but in Ireland on average a field changes hands every 555 years!

This seems rather hard to believe, unless the original source is only including the Anglo-Irish propertied class or some other such thing (by the way, quote, please?).

And you have heard of the Land Commission, right?

@Pat Donnelly
Things will worsen before they get better, best to sell up now and buy back in 10 years or so. The sooner they sell, the sooner they can buy back!

And what will they do in the 10 years? Leave their home and community to go to the cities in the hope that they will be able to buy back into a 3rd community afterwards?

People don’t think like that -they want to live settled in their own area, and in rural areas the only employment is farming. Moving is for the young.

@tommy
I was agreeing with you. The simplest things that have to be done here cost money to do and are not required abroad. In terms of dead or dry cows, look at the streets of New Delhi in India? Much cheaper than slaughter and disposal…

@ tommy tighe

I am not sure where you take your infomration on lamb prices from – the ones you quoted for the early 90s are at best valid for early lamb production which is a specialised enterprise and only accounts for a fraction of output. Spring (factory) lams went for about £45 in 1990/91. As I noted above since farmers are well organised they could easily get involved in wholesale/processing and hence could impact on the market.

I got out of farming around that time because it was obvious that the future was not bright. I argued at the time (within the IFA) that the best thing that could have happened to Irish agriculture was the complete removal of subsidies. Given that Ireland has a comparative advantage in grassland based production it could have taken a bigger market share but would have had to restructure. Have a look at New Zealand – they seem to be able to compete. The problem with the IFA and other farming organisations is that they only care about their current members – hence it suited them to have quotas (production rights) which gave the encumbants significant benefits but minimised the modernisation and restructuring of the sector.

In the past farming was protected in trade negotiations but now it is becoming clear that freeing up trade for services and manufactures will come at the cost of agriculture – given the small size of agriculture this is in the best interests of the majority. The IFA have gone down a cul-de-sac.

@ EWI

“…it isn’t the responsibility of farmers to protect the margins of supermarkets, either (and no-one’s fooled by “competitiveness”. Funny how that ever only goes one way).”

You’re confusing the pricing mechanism here. There is a market for farm produce, where farmers sell to supermarkets (or processing companies). There is another market for groceries, where supermarkets (primarily) sell to consumers. If the demand for groceries falls, then the supermarkets will demand less (or less valuable – i.e. less “luxury”) produce from the farms (/processors). Chances are this leaves farm-produce supply a bit higher than farm-produce demand – so prices fall. It’s not a big conspiracy against farmers.

Also, I’m a tad surprised to hear enthusiasm for coop’s – you say coop, I hear cartel! As a (fairly rudimentary) risk management tool, maybe farmers should consider Tesco shares?

@ Marcus
Tesco shares would certainly do. I don’t see why you think that coops are cartels?? Firstly one would expect there to be other players in the market and secondly coops have competed with each other.
There are other ways too – for example producer groups have traditionally been able to secure a premium as they would reduce transactions costs for the processor and give a more certain supply.
One way or another the point remains – a solution to the supposed problem is in the farmers’ hands so why should government get involved.

@ Edgar

I just had a better think about it, and I see what you mean about the coop. I hadn’t considered the efficiency gain from that kind of integration.

Re the Tesco shares – that was mostly a bit of a joke, but it does make me wonder – do Irish farmers engage in risk-management?

@Marcus
I don’t think there is much risk management in Irish farming. I would hazard a guess that they are also hugely underinsured (I stand to be corrected on this – how many have livestock or crop insurance??).

@Paul Tighe
They are farmers, not serfs. If they are in such desperate straits that they have to sell the farm and live off the income for the rest of their days so be it. At least they will get to stay – lots of other people are having to leave the country. I can’t remember the last time I heard of an Irish farmer selling up his land and emigrating. Thousands of Irish small businessmen are now doing just that, along with tens of thousands of Irish-born and tens of thousands of non-irish born. What is the ratio of active farmer emigrants to other economically active emigrants? I’d be really interested. Remember too that many have a pot of gold from their property activities – provided by the rest of the citizens. It is high time to put manners on these evil Leprechauns.

“Leprechaun is an American comedy horror franchise consisting of six films and a comic book series. Beginning with 1993’s Leprechaun the series centers around a malevolent and murderous leprechaun, who, when his gold is taken from him, resorts to any means necessary to reclaim it.”
http://en.wikipedia.org/wiki/Leprechaun_(franchise)
The similarities to the IFA leadership are uncanny.

@Michael Hennigan
“Thus the income obtained from farming – the element affected by a WTO outcome – only accounts for about 8%, on average, of farm household income.” (Alan Matthews)

So, the hypocrisy of a powerful Irish interest helped destroy a world trade agreement that would have lifted millions from poverty – but hardly touched the income of small and medium irish farmers. All because the big farmers at the head of the IFA
A. Want to protect their huge incomes
B. Are afraid to admit the truth about all farmers – they’re public sector workers.

We need the blunt, total truth urgently and permanently.

FYI

Most farmers have livestock insurance. You can’t insure standing crops against the weather- in storage you can.

There is no futures market in milk in Ireland so I can’t hedge my risk by selling forward. In most crops there is an opportunity to sell forward to the merchants but there is no real futures market in Ireland for crops- you have to go to the UK (currency risks) or France.

I do believe there should be opportunities for farmers to hedge their risk- it is common in US/UK. Perhaps some of the CAP money should be diverted to help establish such a trading platform?

@ EWI

Supply of farmland coming onto the market is a mere 8,000 hectares per annum out of a total land-bank of more than four million hectares,” said Derek Brawn, Savills’s Head of Research. “That’s just 0.18% turnover and means that on average each field changes hand once every 550 years.”

I had a link to the original 2007 paper but it has disappeared from the Savill’s archive.

Brawn said that the typical return from farming in Ireland was around €150 per acre and this figure has not changed much over the last 15 years.

“Serious farmers who want to engage in farming on a commercial basis and earn a decent living are looking at buying farms abroad. This will be an increasing trend over the next two-three years and Savills Hamilton Osborne King and their parent in Britain are strategically placed to facilitate this.”

Savills said the link between farm incomes and land values is well and truly broken. It was no longer possible to buy an Irish farm on a commercial basis, by paying €25,000 to €35,000 per acre, and then being able to make a living from it.

@ Paul Iticsdotayee: “We need the blunt, total truth urgently and permanently.”

You ain’t gonna get it – ever!!! The IFA controls the legislature. If, and its a long if, this unpleasant truth ever penetrates then there is the possibility of some movement. Come back in xx years!

The key issue with respect to farming is that it produces an item essential to human life – food. Now if the unfair comparative advantages with respect to food production lies externally – then shut them off. Otherwise please put up and shut up; (nothing personal, you understand). Please stop carping and demand ‘fair-play’ Yes, it will raise local food prices significantly, but the surplus should be retained within the state, cert par. The urban populations will complain like mad, but failure to protect indigenous farmers (family variety as opposed to commercial) means we go hungry when food availability declines – and it will, with a vengeance. Timeframe: 2015 – 2020 is my guesstimate. Much depends on fossil-fuel availability and price.

Many economists may have only a hazy notion about soil composition and its chemistry – its very complex! Millenia ago, farmers figured out about crop rotation and annual set-aside. If you do not do this, the fertility of soil declines. If you attempt (as we are doing) to ‘lever-up’ fertility using fossil-fuel derived fertilizers and commercial farming practices, you erode the soil and reduce its fertility to near zero. It takes a min of 20 years of un-interrupted wild growth to restore that fertility. How about that for an external cost!

Subsidies are no answer. They simply transfer additional costs onto the consumer. As I mentioned in my original comment above, there are solutions to the difficulties of indigenous food production, but no politician will go near them. Any of the ‘economic’ solutions that I have encountered (so far) are merely abstractions of reality. Look nice, sound nice, but useless.

This matter (of indigenous food production for local consumption) is so serious that it needs a specific forum, outside of the ‘usual – politically and financially motivated – suspects’. I know it is very tempting to target specifics, but please try to apply your analyses to the broader issue.

B Peter

Disclosure: I have a small farm, and am an IFA member.

@Michael Hennigan – Finfacts

Kevin Hanrahan of Teagasc at the Rural Development conference last October in Cork remarked that “Land sales are very rare in Ireland” but that “the very small share of farmland that is sold on a yearly basis is not unusual” in the EU. He gives a figure for 2004 in which “Agricultural land sales … accounted for 0.02% of UAA” (usable agricultural area). By your measures that would be once in 5,000 years ! Clearly there’s something more complicated going on here …

While the statements and rhetoric of the IFA may be easily dismissed as political positioning on the part of one interest group, they shouldn’t blind us to the huge problems in the rural economy as a whole – problems that are intimately connected with the construction bubble and the consequent recession.

If you have a look at some other of Kevin’s slides and in particular the graphs on pages 16 through 18, you can see that agricultural land prices from 1998 to 2007 were driven by the price of development land. The earlier steep rise from about 1968 to 1977 is generally agreed to be attributable to EU entry and the CAP – i.e. it reflects a “real” rise in the value of land as a productive factor in agricultural activity. This is supported by a parallel rise in rental values in that period. By contrast from 1998-2007 rental values actually decreased in real terms.

I recall puzzling over the disparity between land values and the €150/acre pa return, and questioning Michael Keane in UCC (who knows a good deal about all this) about it. His explanation was that, with little land coming on the market, farmers who sold their holdings (at inflated prices) for development, were subsequently buying back in to farming elsewhere and bidding up agricultural prices close to that of development land. That probably seemed a perfectly (economically) rational thing to do – their expertise was in farming; they couldn’t farm easily anymore where they were located as urban growth conflicted with agricultural land use; and, after all, land had proved to be a great investment!

The other part of the problem, and a very scary one, is that for those farmers who were not close enough to urban areas to benefit by actually selling out during the boom, the growth in employment opportunities allowed them and/or their spouse to take up off-farm employment. David Meredith of Teagasc has computed statistics based on the QNHS that show a 30% decline in off-farm employment from 2008 to 2009 (more than half of this accounted for by the decline in construction).

In other words, incomes from agriculture have been in close-to freefall for probably a decade or more, but the boom concealed this by providing opportunities for farmers to continue farming, albeit part-time – and probably more importantly for themselves personally, to continue living in the “home-place” – while also having an off-farm job. Usually their spouse worked off the farm also. The crash in construction, and the more general recession and contraction of employment, mean that this crisis in farm incomes is now so-to-speak “above the water line”.

Leaving all of this dysfunctionality to unwind through free-market restructuring or “creative destruction” is hardly a politically or morally feasible option. IMHO it certainly is more deserving of government intervention than Anglo-Irish ever was!

Overall, I suggest that Karl’s original posting is a good deal too economically purist to deal with the complexities of a situation that lies very far from perfect competition and efficient markets 🙂

p.s. The slides from the conference I referred to are available at http://www.teagasc.ie/publications/2009/20091012/. Cathal O’Donoghue’s are also interesting and relevant, but the PDF’s are sometimes difficult to read because of overlays in the original PPT.

You’re confusing the pricing mechanism here. There is a market for farm produce, where farmers sell to supermarkets (or processing companies). There is another market for groceries, where supermarkets (primarily) sell to consumers. If the demand for groceries falls, then the supermarkets will demand less (or less valuable – i.e. less “luxury”) produce from the farms (/processors). Chances are this leaves farm-produce supply a bit higher than farm-produce demand – so prices fall. It’s not a big conspiracy against farmers.

I disagree, and I’m going to quote Ben Dunne:

“Dunne said that selling milk is a licence to print money. “Take the branded milk that sells for 90c a litre, the retailer is getting a margin of 22% and a kickback of about 10% on that milk. The kickback is a bit like ‘hello’ money and getting access to shelf space, and it’s still happening big time.”

He broke down the 90c into 30c or so for the farmer, out of which he has to pay all expenses and make a living. “The cost price to the retailer works out at about 71c and, less the kickback, that comes to about 64c. At that rate, there’s plenty of margin for the dairies and almost as much again for the retailer.”

Added to the high margin on milk, the retailer also benefited from the rapid turnover of the product. “Milk stays on the shelf for no more than two days. That means you turn your stock over 15 times a month and get at least 30 day’s credit. With margins of 32% in this day and age, this is a no brainer and a licence to print money,” said Dunne.”

http://www.farmersjournal.ie/2003/1220/ruralliving/countrylifestyle/feature.shtml

I’ve looked through this thread and seen no reference to such obvious points as hello money or loss leaders, which makes me despair for the real-world awareness of the economics profession.

Also, I’m a tad surprised to hear enthusiasm for coop’s – you say coop, I hear cartel! As a (fairly rudimentary) risk management tool, maybe farmers should consider Tesco shares?

I’ve heard this canard put about a lot as the economists’ answer to every public concern over large corporations. Yet I never see the reality mentioned – that other faceless corporations, investment funds and tax-exile bazillionaires are the ones who will always be firmly in control through their overwhelming ownership of shares.

@ Michael Hennigan.

Ah, I see. The old adage about ‘lies, damned lies, and statistics’ strikes again. A Junior Cert student student could point out the fatal flaw in the calculations of “Derek Brawn, Savills’s Head of Research”.

@ Danny
In Germany you can get crop insurance.

@Alan & Michael
If you go back to the late 80’s and early 90’s and check land prices you will find that even then one could not make a commercial argument for buying agricultural land unless one expected to sell it as development land. Many farmers have cashed in seriously during the boom, selling of sites. I live rurally just at the edge of the wider commuter belt around Dublin and half acre sites were making in excess of 100k. In other words you could get the return from the production on 600 acres by selling half an acre. Agricultural land that was making 1500 pa in 1990 went up to 30000 pa. Michael is right farmers who sold up close to towns at prices above 30k pa bought back elsehere and pocketed the change.

Apart from there being a only a very thin market for agricultural land, leasing is very unusual here, while it seems to be very common in the UK or Germany. Indeed some of the biggest farming operations in Europe are based on leased land wherever it is cheap. I know a guy in Germany who farms 25000 acres in Germany and another 50000 acres in Poland – most of it is leased but he makes a very good living. The difference between him and most of the farmers around here is that he thinks of it simply as a business rather than simply as a way of life.

The IFA want the tax payer to subsidise/protect a way of life – that is always going to be difficult to justify when many others have to change their way of life (see Paul Iticsdotayee above). They have consistently failed to make a good case for subsidies/protection yet their political clout has yielded results. That is not to say that a case can’t be made – but if it is not made and the same bad arguments are trotted out some people are seriously going to loose patience.

@ EWI

Hard to deny any of what you say about the existence of ‘kick-backs’ and supposedly very high margins, so I won’t.

However, I would say that these practices should not be possible if the supermarkets are genuinely competing with one another. If this is all going on then the consumer – not the farmer – is being cheated by the market. Ideally there should be some sort of retail market intervention to ensure more competition between supermarkets (easier said than done no doubt).

What none of this proves is that farmers are being underpaid. The problems you’re highlighting (with the possible exception of the ‘kick-backs’, though I suspect that processors – not farmers – pay that) relate to things happening after the farmers sell their milk.

“I’ve heard this canard put about a lot as the economists’ answer to every public concern over large corporations. Yet I never see the reality mentioned – that other faceless corporations, investment funds and tax-exile bazillionaires are the ones who will always be firmly in control through their overwhelming ownership of shares.”

This is interesting, I’m not sure I understand you. I was (mostly in jest) suggesting that farmers invest in Tesco shares – i.e. if Tesco are tough on them they get dividends, if not they get better produce prices. If it’s a zero-sum game, then they can’t lose. (This is a bit silly though as Tesco do all sorts non-food-produce stuff too, making it a very poor risk management tool). In any case though, the fact that most of the shares are owned institutionally is not a bad thing. Those institutions want a return (dividends or value growth), so what’s the problem? I was never suggesting that farmers take control, simply that they buy in.
Danny Haskins’ contribution about risk management options is much more useful than my Tesco idea though.

Karl Whelan has made a serious error in his comments on IFA’s campaign to rebalance power in the food supply chain.

He points out, quite correctly, that a large range of factors in 2009 affected the price farmers received for produce – the global downturn and consequent reduction in the consumer demand and buying power being among the main factors.

However, he quite wrongly makes the assumption that retailer discounting is not passed back, through the wholesaler, to the primary producer. He states that there is “poor economics” behind the IFA campaign and that low retail prices will not cause low wholesale prices.

To make this assumption is to ignore the realities of where the power is held in the food supply chain, both in Ireland and the European market. By holding a dominant position in the market place – in Ireland the 3 largest retailers hold over 70% of the market share – the retail multiples can determine the price they are prepared to pay for produce from the wholesalers/suppliers.

Karl is very naive to think that retailers selling ham at half price are actually selling absorbing that price cut themselves. The truth is they often complete processer to supply the ham at half price in the first place. And processers then cut the price paid to producers. So the direction of causality runs from retailer right back to the farmer.

Finally, I would like to point out that the politicians and policy makers, representing both farmers and consumers, in Ireland and at EU level, appear to share the IF concerns. Ireland is not alone in developing a Code of Practice. In the UK, the Code is much further progressed, while the European Commission has launched a programme of action to improve the functioning of the food supply chain in the EU. This would indicate that the food supply chain is not operating effectively and that increasing retail dominance is affecting the competitiveness of same.

There are a few issues which appear to being mixed together. My comments are directed at small(ish) family farms.

1. Agriculture produces food – an absolute requirement for human life.

2. Farmers are human – they might like the idea of being able to afford to raise a family.

3. Minimum income for No 2 + a surplus to barter or sell.

The contemporary economic ‘Religious Congregations’ – you can guess whom I am referring to, either cannot nor will not categorize ‘Base-load Food Production’ [BFP] as being beyond the Pale of their math and calculus formulas and equations. I can readily understand the temptation to categorize BFP in quantitative economics terms – but this is pure nonsense.

The world human population has passed, by a significant margin, the ‘carrying capacity’ of the finite amount arable land – the predicament being clouded by a fog of liquid fossil-fuel energy and sophisticated technology. This cannot continue. There are very ominous noises emanating from over the horizon.

Here in Ireland we are relatively speaking, lucky. We have a temperate climate. We have sufficient arable land to provide (comfortably) for 6 million – unless we continue to heed ‘economists’, delude ourselves that land is everlasting, and mistreat the soil with copious amounts of ‘man-made’ fertilizers and selective phyto-toxins. Commercial agriculture is a phenomenon associated with oil – neither are sustainable.

A radical re-think of the nature and role of indigenous food production is mandatory.

B Peter

@BP Woods
I think you will find that fertiliser usage in Ireland is considerably higher than in the countries the IFA keeps complaining about. In any case was the IFA not opposed to the implementation of the Nitrates Directive??

Incidentally it is perfectly possible to have high stocking densities with low fertiliser input – I did that back in the 80’s on very poor soils, which ended up much improved.

Even if food is an absolute necessity that does not mean that markets do not apply – the opposite is true markets are even more important. Or are you saying we should all go back to subsistance farming???? If we did then sure enough the carrying capacity of the world would be a lot smaller than it is now and living standards will be much worse.

The issue highlighted by Karl is that the IFA come up with half-baked arguments. As I said above it might be perfectly possible for them to make good arguments but why are we not hearing them???

@ Edgar Morgenroth: “The issue highlighted by Karl is that the IFA come up with half-baked arguments.” Spot on! Actually they are probably unbaked!

Interesting about the soil improvement – any references? One of my son’s is working a farm. Thanks.

Markets and mandatory food supply: Very difficult to explain this nexus in terms of the orthodox supply v demand relationships. My guess on it is that the ‘markets’ are parochial – neither national nor international – hence the concept would probably be valid for the local markets only. Interesting point though.

My comments about farming relate solely to Ireland. We have no option but to produce enough (wholesome!) food to ensure a steady-state population. Relying on food imports is (except for exotics) a very dodgey policy.

B Peter

The teagasc 2010 economic outlook conference took place recently and the proceedings highlighted the significant difficulties which are currently being faced by Irish primary agricultural producers both in terms of input costs and output prices (especially for our very important and historically competitive dairy sector). There was some discussion regarding the impact of the multiples buying power on farm gate prices. The issue in this context is that concentration and market power of the buyer has not been appropriated factored into competition assessments as the focus is usually on seller concentration (traditional industrial organisation theory). While this issue may potentially have some truth, I think a more important consideration is the fact that the variance of profitability in Irish farmers is very significant. Teagasc estimates inidicate only about 30% of farms are long run viable. The core strategic focus for agriculture should be on increasing the scale and scope of farm sizes and rationalising the industry into one which can compete with imports and on the international market place.

@ Conor: “The core strategic focus for agriculture should be on increasing the scale and scope of farm sizes and rationalizing the industry into one which can compete with imports and on the international market place.”

Very useful comment – although I disagree with it! Providing a ‘Base-load’ Food Supply for the indigenous population is indeed a strategic imperative, but one which must be achieved without having to import anything. This is where I perceive the real difficulty – a. What is the mandatory supply, and b. how is it intended that it should be supplied, c. what happens when fossil fuels and inorganic fertilizers become ‘rate limiting’? You cannot, in any circumstance, rely on importation of food (except the area of indigenous arable land is drastically less than needed). If the latter, you are completely at the mercy of your external supplier/s.

I hold the view (opinion, belief, or what have you) that The Base Load Food Supply for the indigenous population cannot be the subject to the orthodox supply/demand relationships – an adequate and reliable supply of food is – well, essential! We did have a food availability problem during 1845 – 1847 – and ‘the market’ ensured that it became even worse!!

I submit, that this matter (of indigenous food production) is critical, and should be debated and discussed at some length. There are neither simple nor easy answers.

B Peter.

While I agree with Karl that the reintroduction of Grocery Order-style regulation of retailer margins, purportedly to protect family businesses and farmers upstream in the supply chain would be completely counter-productive, I don’t think this means we should blind ourselves to the potential for the exercise of market power in what is quite an oligopolistic grocery market in Ireland

As far as retailers are concerned, this market power can be exercised either on the buying side of the market (vis a vis processors and handlers of fresh produce) or the selling side (vis a vis consumers). The Competition Authorty has kept a watching brief on this since the repeal of the Groceries Order (various reports on the groceries sector can be downloaded from its website). Its conclusion was:

“In relation to the grocery sector in particular, the Competition Authority did not find any behaviour or practice, relating for example to the buyer power of retailers, adversely affecting the normal competitive dynamics of
supply chains. Indeed, it was noted that there are situations in the grocery sector in Ireland where the strength of some buyers may ultimately have pro-consumer benefits.”

Ultimately, the exercise of market power will show up in super-normal profits and in this regard I would like to see the major multiplies being required to report turnover and profits in this jurisdiction separate from their other global operations. Of course, given the way the multiples have expanded beyond grocery retailing to many other lines of business, profit shares for the overall business will only be imperfectly correlated with margins on groceries, but I still think greater transparency in margins in the food chain would be pro-competitive. Evidence from Tesco management documents suggest that their rate of profit in the Republic is much higher than for the parent company in the UK http://www.irishtimes.com/newspaper/frontpage/2009/0511/1224246256045.html

Some people highlight particular practices by supermarkets in relation to suppliers as evidence of their market power. The Competition Authority notes that the amendment to the Competition Act in 2006 introduced a new Part 2A designed to prevent unfair practices in the grocery trade. The philosophy of the Act is that it doesn’t really matter if there are dastardly activities going on the supply chain (payment of hello money, unilateral renegotiation of contracts, requirements to pay for advertising promotions or shelf space) provided that they pass a ‘competition test’. This means in effect that these practices are ok provided that any savings are passed on in lower prices and that they benefit the consumer. It makes for uncomfortable business relationships (witness the court case by Whelans Distributors against Dunnes in 2006) but it does ensure that cost savings (such as due to the sterling devaluation) are passed through to consumers as quickly as possible.

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